Depreciation recapture on sale of rental property

[Golfer55]

My spouse has owned a rental property before we were married.  She always filed single and itemized.  There were years in which she zero taxable income, some years because she had no earned income and other years because itemized and exemptions exceeded agi.

we now file jointly and are considering selling rental property.  In each of her single years, there was depreciation calculated and reported on sch. E.  If she had zero taxable income even before considering rental losses, do we have to count the depreciation calculated in those years as part of the formula for depreciation recapture?

[RyanH5]

Hi Golfer55. Thank you for joining us today.

Unfortunately, yes any depreciation allowed of allowable to take as a deduction would be subject to recapture. This even applies if you wife chose not to take any depreciation in a given year.

Depreciation of rental properties is calculated using the straight line, mid month method over 27.5 years.

[Golfer55]

Thanks Ryan.  I was afraid that would be the answer.

A little followup.  It’s too late now, but could that unused depreciation have been used in calculating Net Operating Loss for a Carryforward event?

[Ruth C-L]

Great answers from the previous expert. Any unused passive losses (rental losses are mostly passive unless you're a real estate agent/attorney) should be carried forward until the property is sold. In the year of sale, you can use all unused passive losses to offset other income reported on the return. 

Ruth C-L, CPA, Esq.

[Mike9241]

maybe no nol if her itemized deductions were in excess of her rental loss

the quick computation for an NOL is the excess of business losses (rental) over business income (would include w-2 wages) reduced by the excess of non-business deductions (her itemized deductions over non-business income (this may ignore certain items that would affect the NOL. the only way to know for sure would be to complete form 1045 schedule A for each year.    Negative AGI would probably indicate there is an nol. 

[Ruth C-L]

NOLs are different than passive losses. The key to determining when you have a net operating loss is that the loss must be from “operating,” i.e., from “active” sources of income or deductions as opposed to “passive” ones or from personal expenses. Since most passive activities and investment losses have their own different carryover rules, they are not included in the NOL calculation. Passive losses which cannot be used during the year become suspended passive losses, and those losses cannot be included in the NOL.

[Mike9241]

@Golfer55 There is no way to know if she had an NOL or PAL or neither in any of those years. We also don't know the years in which the losses occurred while she was single. Amended returns for those years may be barred by the statute of limitations. It would probably take a tax pro to go through her returns to see if anything can be done. That could be costly and then you might not gain anything to reduce the taxes for the year sold

[saxline-86]

where do you find  the amount to use when filing sale of rental property/

[PatriciaV]

Please clarify your question, @saxline-86 . What amount are you looking for? The sales proceeds? Rental Property basis? Accumulated Depreciation?